I discovered a consumer-purpose loan that originally was structured as a commercial loan. The purpose of the loan was to construct a primary residence for two individual borrowers, but the members of an LLC also signed the note. What is our potential liability? Is there anything we can do to cure our violations?

Your bank could be subject to potentially significant liability due to its failure to provide the required disclosures under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). For example, your bank could be liable for up to twice the amount of the total finance charge for the loan, or a penalty of $400 – $4,000 for closed-end mortgage loans, plus costs and reasonable attorney’s fees, for violations of the TILA disclosure requirements. These penalties are even higher if the mortgage loan is a high-cost mortgage loan. Also, due to your bank’s failure to assess the borrower’s ability-to-repay before originating the mortgage loan, your bank could be liable for the sum of all finance charges and loan fees paid by the borrower.

Additionally, the borrower’s right to rescind the transaction would run for three years, rather than three days, if your bank failed to provide notice of the borrowers’ right to rescind the loan.

Although it is unlikely that your bank would be found to have willfully and knowingly failed to provide these disclosures, if such a finding were to be made, your bank also could be subject to criminal liability.

For resources related to our guidance, please see:

Truth in Lending Act, 15 USC 1640 (“(a) Individual or class action for damages; amount of award; factors determining amount of award. Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title, subsection (f) or (g) of section 1641 of this title, or part D or E of this subchapter with respect to any person is liable to such person in an amount equal to the sum of

(1) any actual damage sustained by such person as a result of the failure;

(2) (A) (i) in the case of an individual action twice the amount of any finance charge in connection with the transaction, . . . . or (iv) in the case of an individual action relating to a credit transaction not under an open end credit plan that is secured by real property or a dwelling, not less than $400 or greater than $4,000; . . .”)

Truth in Lending Act, 15 USC 1640(a)(4) (“In the case of a failure to comply with any requirement under section 1639 of this title, paragraph (1) or (2) of section 1639b(c) of this title, or section 1639c(a) of this title [ability-to-repay requirements], an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.”)

Regulation Z, 12 CFR 1026.15(a)(3) (“If the required notice and material disclosures are not delivered, the right to rescind shall expire 3 years after the occurrence giving rise to the right of rescission, or upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.”)

Truth in Lending Act, 15 USC 1611 (“Whoever willfully and knowingly (1) gives false or inaccurate information or fails to provide information which he is required to disclose under the provisions of this subchapter or any regulation issued thereunder, . . . or (3) otherwise fails to comply with any requirement imposed under this subchapter, shall be fined not more than $5,000 or imprisoned not more than one year, or both.”)